Powers of attorney as criteria for de facto control in Polish controlled foreign corporation provisions: a comparative and practical analysis
Controlled foreign corporation (CFC) legislation constitutes one of the most significant anti-avoidance mechanisms in the contemporary international tax landscape. The fundamental premise underlying these regimes is the attribution of income earned by foreign entities under a taxpayer’s control to the domestic tax base, irrespective of whether such income has been actually distributed. Yet the linchpin of any effective CFC regime – the precise delineation of “control” – presents formidable conceptual and practical challenges that transcend superficial notions of ownership.
INTRODUCTION
Traditional approaches, premised exclusively upon formal ownership criteria such as shareholding percentages or voting rights, have proven increasingly inadequate in confronting the sophisticated architecture of modern international tax planning. In response to these challenges, numerous jurisdictions have begun incorporating concepts of “de facto control” into their tax codes, seeking to capture economic realities that extend beyond formal proprietorship.
Poland’s implementation of de facto control provisions in Article 30f of the Personal Income Tax Act, effective January 1, 2019, represents a particularly innovative approach that distinguishes itself through its analytical precision and practical sophistication. The express inclusion of “granted powers of attorney” (udzielone pełnomocnictwa) as a basis for de facto control constitutes one of the most explicit legislative treatments of this phenomenon in comparative international tax law and merits comprehensive examination from both doctrinal and practical perspectives.
This analysis proceeds from the proposition that Poland’s approach reflects a nuanced understanding of the practical mechanics underlying international tax avoidance structures, where formal ownership arrangements increasingly serve as facades for more complex control relationships effectuated through legal instruments that operate independently of traditional corporate governance mechanisms.
GENESIS AND EVOLUTION OF CFC LEGISLATION
The genesis of CFC legislation traces to the United States’ enactment of Subpart F of the Internal Revenue Code in 1962, a legislative response to American corporations’ systematic transfer of income to low-tax jurisdictions. The American model established the foundational template subsequently adopted by other jurisdictions, albeit with adaptations reflecting diverse legal traditions and policy priorities.
Early CFC regimes characteristically relied upon formal ownership thresholds, typically requiring control of more than fifty percent of voting rights or shares, with some jurisdictions adopting lower thresholds in cases of dispersed ownership structures. This approach, while administratively convenient and providing relative legal certainty, rapidly demonstrated its limitations as international tax planning became increasingly sophisticated.
The proliferation of offshore structures throughout the latter half of the twentieth century exposed fundamental weaknesses in ownership-based control tests. The utilization of Anglo-Saxon trusts, civil law foundations, nominee arrangements, and complex corporate structures enabled taxpayers to maintain effective control over foreign entities while circumventing the formal ownership criteria contemplated by traditional CFC legislation. This phenomenon became particularly pronounced during the 1990s, as capital liberalization and technological advances facilitated increasingly elaborate international structures.
The regulatory challenge intensified with what scholars have termed “jurisdiction shopping” – the strategic location of structures in jurisdictions offering not merely preferential tax treatment, but sophisticated legal instruments for obscuring beneficial ownership. The deployment of entities subject to professional secrecy obligations, including trustees, foundation administrators, and nominee directors, enabled the creation of ostensibly independent structures that remained under the ultimate control of the beneficial owner. These developments necessitated a fundamental reconceptualization of control in tax law.
PRACTICAL MECHANICS OF CONTROL THROUGH POWERS OF ATTORNEY
Understanding the ratio legis of Poland’s treatment of powers of attorney as a basis for de facto control requires examination of the actual mechanisms through which taxpayers have historically utilized such instruments to maintain effective control while circumventing formal ownership criteria in traditional CFC legislation.
The archetypal tax avoidance structure employing powers of attorney followed a predictable pattern. A Polish taxpayer, seeking to minimize tax obligations, would establish a foreign legal entity – typically an offshore corporation or foundation – in a preferential tax jurisdiction. Legal title would be vested in an independent third party, often a professional trustee or nominee director, thereby avoiding direct ownership connections that might be detected by Polish tax authorities.
Concurrently, however, the Polish taxpayer could not afford to relinquish genuine control over assets placed within the offshore structure. To address this imperative, the taxpayer would enter into a series of fiduciary arrangements designed to preserve actual control while maintaining apparent structural independence. Powers of attorney constituted the critical mechanism enabling the Polish taxpayer to exercise practical management authority without formal share ownership.
These powers of attorney typically exhibited extraordinarily broad scope, encompassing virtually all aspects of the offshore entity’s operations. A characteristic power of attorney would include authority over bank account management, investment decisions, contract execution, representation before public authorities, and even liquidation or sale of the entire structure. Frequently, such powers contained no temporal, monetary, or subject matter limitations, effectively conferring unlimited authority over the offshore entity.
Particularly sophisticated structures employed multi-tiered power of attorney systems, wherein the Polish taxpayer received authorization from one entity that, in turn, possessed powers from another entity in the ownership chain. Such arrangements were designed to further obscure the trail of actual control and complicate tax authorities’ identification of the ultimate beneficial owner.
The banking sector played a crucial role in these constructions, as powers of attorney required formal registration to enable practical asset management. Banks, particularly those operating in traditional offshore centers, developed specialized procedures for servicing such structures, often without conducting penetrating inquiries into the genuine basis for such expansive authorizations. This practice was facilitated by relatively permissive compliance requirements prevailing in many offshore jurisdictions prior to the implementation of FATCA and CRS standards.
An additional element strengthening these constructions was the utilization of banking and professional secrecy protections available in offshore jurisdictions. Even when Polish tax authorities suspected the existence of concealed structures, obtaining information regarding broad powers of attorney proved practically impossible due to the absence of appropriate information exchange mechanisms. This situation changed only with the introduction of automatic exchange of tax information (CRS) and strengthened international cooperation in combating tax avoidance.
NORMATIVE CONSTRUCTION OF POLISH DE FACTO CONTROL PROVISIONS
Poland’s definition of de facto control, contained in Article 30f, paragraph 2, point 1b of the Personal Income Tax Act, exemplifies sophisticated legislative technique that responds thoughtfully to the practical challenges of identifying genuine control in international tax avoidance structures. The provision defines de facto control as “control which, taking into account factual circumstances, allows for the exercise of dominant influence over the functioning of a foreign entity through influence on decision-making at the highest level regarding matters concerning the foreign entity or the ability to direct or influence its day-to-day operations.”
This definition incorporates several critical structural elements, each bearing significant implications for practical application. The teleological element requires the capacity to exercise “dominant influence” over the entity’s functioning, with the term “dominant” indicating the necessity of unilateral authority to shape crucial operational aspects without requiring consent from other parties. The legislature thereby excluded from the scope of de facto control situations where influence requires cooperation with other entities or obtaining their approval, corresponding to the genuine nature of control as the capacity for unilateral decision-making.
The substantive element of the definition exhibits a dual character, providing alternative forms of de facto control exercise. Influence may manifest through strategic-level impact – influence on decision-making at the highest level regarding matters concerning the foreign entity – or through operational-level authority – the ability to direct or influence day-to-day operations. This approach acknowledges the diversity of control methods in business practice, recognizing that some individuals focus on strategic decisions while delegating operational management to others, while others prefer direct supervision of daily activities.
The causal element specifies that de facto control must derive from particular legal or factual bases, with the catalogue of such bases being illustrative rather than exhaustive, as signaled by the phrase “in particular.” This approach permits consideration of diverse control instruments while avoiding confinement to a predetermined closed catalogue that might quickly become obsolete through new, unforeseen legal constructions.
Among the bases for de facto control, the legislature expressly identified “granted powers of attorney,” positioning them alongside “agreements creating the foreign entity” and “documents regulating the establishment or functioning of that entity.” This normative positioning carries profound interpretive significance, indicating the attribution to powers of attorney of fundamental importance in shaping control relationships, comparable to the entity’s constitutive documents.
The ratio legis of this solution reflects the Polish legislature’s sophisticated understanding of offshore structure mechanics and tax avoidance practices described in the preceding analysis. In international commerce, individuals genuinely controlling offshore structures often remain concealed behind formal fiduciary arrangements with entities subject to professional secrecy obligations, while simultaneously requiring concrete legal instruments enabling actual asset management and key business decisions.
Broad powers of attorney constitute the natural “entry point” for such control, being essential for exercising genuine authority over assets while creating a verifiable documentary trail that may be detected by tax authorities, particularly in an era of strengthened international cooperation and automatic tax information exchange. The legislature was equally cognizant that the banking sector represents a particularly vulnerable point for detecting such powers of attorney, as financial institutions subject to comprehensive compliance obligations must register and document broad authorizations enabling effective asset control.
COMPARATIVE ANALYSIS OF INTERNATIONAL APPROACHES
To fully appreciate the innovative character of Poland’s approach to powers of attorney as a basis for de facto control, comparison with solutions adopted in other developed legal systems grappling with similar challenges in identifying genuine control within international tax avoidance structures proves essential.
American CFC provisions, embodied in Subpart F of the Internal Revenue Code, traditionally rely upon formal control criteria, requiring ownership of more than fifty percent of voting rights by “United States shareholders.” De facto control receives no express statutory treatment, although American tax doctrine and judicial precedent have developed concepts of “constructive ownership” permitting control attribution in specified circumstances, such as family relationships or particular corporate connections. The American approach to powers of attorney remains fragmentary, deriving primarily from interpretations of specific cases adjudicated by courts, with Treasury Regulations containing no systematic analysis of powers of attorney as control instruments – a significant gap particularly given the increasing prevalence of structures utilizing offshore trustees and other professional fiduciaries.
German CFC provisions, regulated in sections 7-14 of the Außensteuergesetz, introduce the concept of “beherrschenden Einfluss” (dominant influence), which may arise from factual circumstances transcending formal ownership relationships. German tax doctrine and administrative court jurisprudence have developed detailed criteria for assessing de facto control, considering inter alia the ability to influence key business decisions, management structure, and actual exercise of control rights. While German provisions do not expressly designate powers of attorney as a control basis, interpretive practice by tax authorities, developed through numerous rulings by the Bundesfinanzministerium, recognizes broad powers of attorney as significant evidence of dominant influence, particularly in family office structures and professional asset management arrangements.
French CFC provisions, contained in Article 123 bis of the Code général des impôts, adopt a hybrid approach combining formal control criteria with de facto control elements, providing for control recognition in cases of “influence dominante” arising from factual circumstances beyond ownership relationships. French administrative practice, developed through numerous decisions by the Conseil d’État, considers powers of attorney as one element in assessing de facto control, though lacking the precise statutory regulation found in Polish law, thereby leaving considerable interpretive discretion to tax authorities and potentially creating legal uncertainty.
British CFC provisions, currently contained in Part 9A of the Taxation (International and Other Provisions) Act 2010, rely upon a broadly defined concept of “control” in section 371RA, encompassing not only formal voting rights but also the “power to secure” specified results in company management through any legal or factual means. The British approach to powers of attorney is pragmatic, developing primarily through case law and guidance materials published by HM Revenue and Customs. HMRC officially recognizes that broad powers of attorney may constitute a control basis, particularly when enabling “decisive influence” over company activities, though each case requires individual factual analysis.
International standards developed by the OECD through the Base Erosion and Profit Shifting (BEPS) project, particularly Action 3 concerning CFC rule strengthening, contain no detailed guidance regarding powers of attorney as de facto control instruments. The OECD focuses primarily on general principles for identifying de facto control and harmonizing basic concepts, while granting national legislatures considerable discretion in shaping detailed criteria according to their legal system specificities. The Model Commentary to Article 1 of the OECD Model Convention mentions “de facto control” as complementing formal ownership criteria but does not develop this concept in the context of specific legal instruments such as powers of attorney, thereby preserving space for innovative national solutions.
LEGAL QUALIFICATION OF POWERS OF ATTORNEY AS BASIS FOR DE FACTO CONTROL
For recognition of a power of attorney as a basis for de facto control under Polish CFC provisions, conducting detailed analysis of its material scope in light of the definition contained in Article 30f, paragraph 2, point 1b of the Personal Income Tax Act proves crucial. The power of attorney must enable the exercise of “dominant influence” over the foreign entity’s functioning through one of the alternative mechanisms provided in the statute: influence over strategic decisions or direction of daily operations.
Influence over strategic decisions, defined in the statute as “influence on decision-making at the highest level regarding matters concerning the foreign entity,” requires that the power of attorney encompass authority to make key business decisions of fundamental importance to the entity’s functioning. This category includes primarily asset management and investment decisions, which may encompass purchase and sale of assets, placement of funds in various financial instruments, or investment strategy determinations. Equally significant are powers to incur obligations and establish security interests, which may fundamentally affect the entity’s financial position and its capacity to achieve business objectives.
Direction of the entity’s daily operations, described in the statute as “the ability to direct or influence its day-to-day operations,” signifies the capacity to influence the entity’s ongoing operational functioning in aspects that, while potentially appearing less significant than strategic decisions, often prove crucial for genuine control exercise. This category includes financial liquidity management, encompassing decisions regarding fund distributions, inter-account transfers, and cash flow management. Significant importance also attaches to the capacity to conduct banking operations, legal representation, and management of relationships with counterparties and financial institutions.
Central to qualifying a power of attorney as a basis for de facto control is satisfaction of the “dominant influence” test, which constitutes the core element of the de facto control definition. The dominant character of influence signifies the capacity for unilateral shaping of crucial operational aspects without requiring consent from other entities, distinguishing de facto control from ordinary influence or participation in decision-making processes. In the context of powers of attorney, this test may be satisfied by demonstrating the attorney-in-fact’s decisional autonomy, enabling significant decisions independently without requiring consultation with entity organs, other attorneys-in-fact, or any external parties.
Equally significant for satisfying the dominance test is the broad substantive scope of the power of attorney, which must encompass a substantial portion of the entity’s business activities rather than merely selected, marginal aspects of its operations. A power of attorney limited to a narrow range of activities, even if granting considerable discretion within that range, will not suffice for de facto control recognition if it fails to encompass crucial areas of entity activity. Finally, the dominance test requires the absence of effective limitations in exercising rights derived from the power of attorney, whereby the power of attorney cannot contain genuine control or supervisory mechanisms that might restrict the attorney-in-fact’s freedom of action or condition the exercise of powers upon consent from other parties.
A critical issue for proper power of attorney qualification in the CFC context is determining whether a justified underlying relationship exists that would explain the grant of such broad powers to an individual formally unconnected to the entity through ownership. In business practice, broad financial powers of attorney may be justified by specific professional relationships grounded in the provision of concrete business services. This category includes primarily investment advisory services, where the attorney-in-fact serves as a licensed investment advisor managing a client’s portfolio under formal asset management agreements, representing standard practice in the wealth management industry.
Similarly justified may be asset management in family office structures, where specialized entities manage wealthy families’ assets under comprehensive service agreements encompassing not only investment management but also estate planning, risk management, and coordination of various financial aspects. Equally justified are corporate functions, where the attorney-in-fact performs actual chief executive officer, chief financial officer, or other key managerial roles within the organizational structure, receiving the power of attorney as an instrument necessary for professional obligation fulfillment.
Each of these cases is characterized by the existence of concrete, verifiable elements confirming the genuine nature of the professional relationship. Primarily, there must exist a formal agreement precisely defining the relationship between parties, the scope of services provided, and each party’s rights and obligations. Significant importance also attaches to compensation for services rendered, which should be proportionate to the scope of obligations and correspond to market standards for the given type of service. In cases of professional services requiring special qualifications, possession of appropriate licenses or professional credentials confirming competence to provide the particular type of service is necessary.
The attorney-in-fact’s economic independence from the principal also bears crucial significance, which should manifest through possession of other clients, independent business infrastructure, and absence of exclusive financial dependence upon a single principal. Finally, a genuine professional relationship should be characterized by transparent reporting and supervisory procedures that enable the principal to monitor service quality while respecting the service provider’s professional independence.
In the absence of demonstrating a justified underlying relationship explaining the grant of such broad powers, a strong presumption arises that the power of attorney serves to conceal the genuine control relationship between the attorney-in-fact and the entity granting the power of attorney. This presumption rests upon the fundamental assumption of rational business conduct, whereby entities operating in commercial transactions do not grant broad authority to dispose of their assets to third parties without appropriate economic justification. The absence of such justification suggests the existence of hidden connections between the parties, rendering the power of attorney grant effectively an internal act within a structure controlled by the taxpayer.
CONCLUSION
Poland’s express recognition of powers of attorney as a basis for de facto control in CFC legislation represents a significant advancement in international tax law’s treatment of sophisticated avoidance structures. By acknowledging the practical reality that effective control frequently operates through legal instruments divorced from formal ownership, the Polish approach demonstrates legislative sophistication that merits broader international consideration.
The comparative analysis reveals that while other jurisdictions have grappled with similar challenges, none have achieved the clarity and precision embodied in the Polish formulation. This legislative precision serves both taxpayer certainty and administrative effectiveness – crucial elements often in tension within anti-avoidance regimes.
The practical significance of this approach extends beyond Poland’s borders, as international tax planning increasingly relies upon structures that exploit definitional gaps in traditional control concepts. As automatic information exchange mechanisms mature and cross-border transparency increases, the Polish model may prove influential in shaping future international standards for CFC legislation.
The analysis suggests that effective CFC regimes must evolve beyond formal ownership criteria to encompass the economic reality of modern international structures. Poland’s treatment of powers of attorney provides a roadmap for such evolution, demonstrating that legislative precision and practical effectiveness need not be mutually exclusive in the complex domain of international tax law.
Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.
